## 1. MENAP Oil-Exporting Countries: Feeling the Impact of Lower and More Volatile Oil Prices ## Source details **Canonical URL:** [1. MENAP Oil-Exporting Countries: Feeling the Impact of Lower and More Volatile Oil Prices](https://www.imf.org/-/media/files/publications/reo/mcd-cca/2019/april/english/menap-chapter1.pdf) ## Other formats - [Markdown version](/-/media/files/publications/reo/mcd-cca/2019/april/english/menap-chapter1.pdf.md) - [Structured JSON version](/-/media/files/publications/reo/mcd-cca/2019/april/english/menap-chapter1.pdf.json) --- ### Growth outlook and near-term drivers - Growth in MENAP oil exporters is projected at 0.4 percent in 2019. - Key drivers of the muted outlook: - Sharp decline in Iran’s economic activity (of 6 percent). - Oil production cuts in line with the December 2018 OPEC+ agreement. - Tighter domestic financial and monetary conditions in some countries. - GCC growth expectations: - GCC countries expected to grow 2.1 percent in 2019, up from 2 percent in 2018. - Support factors: government spending and multiyear infrastructure plans in Kuwait and Saudi Arabia; Expo 2020–related spending and Abu Dhabi’s fiscal stimulus in the United Arab Emirates; Barzan Gas Project operations underpinning Qatar’s hydrocarbon production. - Bahrain: non-oil growth expected to slow due to planned fiscal consolidation under the authorities’ fiscal balance program. - Non-GCC oil exporters: - Growth set to contract by 1.7 percent in non-GCC oil exporters after contracting by 1.1 percent in 2018. - Algeria: slightly higher growth in 2019 due to a rebound in oil and gas production. - Yemen: moderate improvement in oil production despite conflict. - Iraq: recovery supported by post-conflict recovery, a rise in fiscal spending, and modest oil production increases after federal/KRG agreement on oil exports. - Medium-term projections depend on implementation of adjustment and reform packages; escalation of regional tensions is a downside risk. ### Oil prices and volatility - Oil prices turned highly volatile at the end of 2018: prices increased nearly 30 percent in the first 10 months of 2018 to more than $80 a barrel, then declined sharply in Q4 2018. - Oil is now trading at about $65 a barrel, just above this year’s projected average. - Renewed volatility reflects supply disruptions, global growth concerns, technological changes, geopolitical uncertainties, US sanctions on Iran and subsequent waivers, and Saudi Arabia’s production ramp-up. - The December 2018 OPEC+ agreement to restrain production until at least June was a response to these swings. - CBOE Crude Oil Volatility Index reached levels last seen during the 2014–15 commodity price shocks (last observation April 1, 2019). ### External and financial balances - Current account balance for the region expected to drop from 5.3 percent of GDP in 2018 to 0.9 percent of GDP in 2019. - Less-supportive global financial conditions in 2018 raised external sovereign borrowing costs for weaker fundamentals (Bahrain, Oman). - Global bond index inclusion for GCC countries could bring some $40 billion in flows over the next year or so, according to market analysts. - EPFR flows: net capital outflows during H2 2018 contributed to lower domestic liquidity growth; global easing in early 2019 led to a recent pickup in capital inflows. - Tighter domestic financial conditions (policy rate increases in GCC, declines in real estate and equity prices) have restrained non-oil activity and contributed to declines in credit and money supply growth. - Credit is expected to decline in most countries; risks of higher nonperforming loans in Bahrain, Oman, United Arab Emirates due to exposure to slowing real estate markets and weak non-oil growth. ### Fiscal positions and consolidation - Fiscal consolidation in the region began in 2014 but slowed with the 2018 oil price rebound; consolidation is projected to slow further in 2019 despite lower projected oil prices. - Fiscal expansion is expected in Algeria, Iraq, and Saudi Arabia in 2019. - Slower consolidation amid lower projected oil prices would heighten near-term vulnerability in countries with limited fiscal space and elevated public debt. - Fiscal breakeven oil prices remain significantly above the current oil price trajectory despite recent reductions. - Total general government debt increased between 2014 and 2018 (country-specific levels shown in source figures). ### Structural challenges and policy recommendations - Need to resume gradual fiscal adjustment to rebuild buffers and insulate economies from oil price volatility. - Adjustment size and pace should reflect country-specific fiscal space and financing needs. - Fiscal stimulus or slower consolidation may be counterproductive given lower potential growth, especially in countries with weak fundamentals (Bahrain, Oman). - Recommended design of consolidation: - Mix expenditure consolidation with revenue reforms. - Reinforce VAT implementation and reduce public wage bills in some countries. - Continue revenue mobilization: Oman’s plan to introduce VAT is welcomed; consider introducing direct taxes (income, property); fight tax avoidance and evasion. - Expenditure reforms: strengthen public investment management frameworks; streamline public wage bills and subsidies; increase social spending; improve fiscal transparency and public financial management. - Anchor fiscal policy in a medium-term fiscal framework with a clear objective (debt ratio, non-oil primary balance target, or multiyear budgeting rule). - Diversification and growth-enhancing structural reforms: - Shift toward private-sector-driven growth to spur domestic investment and nonhydrocarbon foreign investment. - Improve quality of education, reform labor markets, integrate nationals into private employment, and maintain competitiveness. - Improve business environment: robust legal frameworks for dispute prevention/resolution; liberalize foreign ownership regulations; reduce role of public sector as competitor. - Strengthen governance and anti-corruption measures, including anti-bribery and integrity measures and addressing conflicts of interest. - SME-focused measures (SMEs account for more than 90 percent of businesses): - Increase access to financing: tailor funding to SME needs; enhance credit information; promote bank competition; develop capital markets. - Enhance human capital and infrastructure: efficient expenditures on education, technology, and key infrastructure such as broadband. - Deliver a more favorable business environment: robust legal, regulatory, and taxation frameworks; ensure level playing field; improve governance in tax administration and public procurement. ### Social and labor market considerations - Rapid labor force growth in the GCC: IMF staff calculations suggest the region will need about 1 million new jobs a year for at least the next five years to absorb new entrants. - High unemployment, particularly among young people, underscores urgency of reforms to generate inclusive job-rich growth. ### Box 1.1. Financial and Monetary Conditions Indices in GCC Countries - Motivation and purpose: - An FMCI could serve as an early indicator of future non-oil economic activity in GCC countries. - Data constraints and challenges: - Lack of timely data reduces the variables that could be included. - House price data are available only for Qatar and the United Arab Emirates. - Absence of data on inflation expectations makes it difficult to determine inflation-adjusted real returns. - A monthly industrial production index is not available to assess predictive power of the FMCI against a high-frequency activity indicator. - Dubai’s quarterly GDP figures end in 2017, and quarterly GDP is not available for Oman. - Bond markets are not liquid enough yet to incorporate changes in the yield curve or the term spread into the FMCI. - FMCI composition (variables included): - Money growth, M2 (year over year) - Stock market (year over year) - Real policy rate—the latest annual inflation rate is used as a proxy for inflation expectations - Real effective exchange rate - House prices (Qatar, United Arab Emirates) - Construction, standardization, and interpretation: - Variables with the highest volatility are given the lowest weight. - The series is standardized by subtracting the FMCI’s mean and dividing by its standard deviation. - An FMCI value above (below) zero implies a tightening (loosening) in the financial conditions. - The FMCI is used as an early indicator of non-oil GDP growth. - Empirical findings and predictive relationships: - Loosening (tightening) in the FMCI is followed by an increase (decrease) in non-oil activity with a one-quarter lag, where quarterly GDP is available. - Correlations between the FMCI (used as an early indicator) and non-oil GDP growth (last observation December 2018): - Saudi Arabia: Correlation = 0.90 (FMCI inverse, 1-quarter lead) - UAE: Dubai: Correlation = 0.89 (FMCI inverse, 1-year lead) - Qatar: Correlation = 0.73 (FMCI inverse, 1-quarter lead) - Bahrain: Correlation = 0.45 (FMCI inverse, 1-quarter lead) - Kuwait: Correlation = 0.34 (FMCI inverse, 1-quarter lead) - The tightening in the FMCI (reversed in Figure 1.1.1), which started in late 2017, has continued and is likely to be a drag on non-oil growth in early 2019 as well. - Main drivers of FMCI tightening: - Higher policy rates - Declines in real estate (Qatar, United Arab Emirates) - Declines in equity prices (Bahrain, Dubai, Oman) - Slowdown in liquidity growth driven in part by capital outflows *Prepared by Selim Cakir (lead author) and Jorge de León Miranda. Middle East and Central Asia Department — REO Update, April 2019.* ### 1. MENAP Oil-Exporting Countries: Feeling the ### 1. MENAP Oil-Exporting Countries: Feeling the Impact of Lower and More Volatile Oil Prices ### Growth outlook and near-term drivers - Growth in MENAP oil exporters is projected at 0.4 percent in 2019. - Key drivers of the muted outlook: - Sharp decline in Iran’s economic activity (of 6 percent). - Oil production cuts in line with the December 2018 OPEC+ agreement. - Tighter domestic financial and monetary conditions in some countries. - GCC growth expectations: - GCC countries expected to grow 2.1 percent in 2019, up from 2 percent in 2018. - Support factors: government spending and multiyear infrastructure plans in Kuwait and Saudi Arabia; Expo 2020–related spending and Abu Dhabi’s fiscal stimulus in the United Arab Emirates; Barzan Gas Project operations underpinning Qatar’s hydrocarbon production. - Bahrain: non-oil growth expected to slow due to planned fiscal consolidation under the authorities’ fiscal balance program. - Non-GCC oil exporters: - Growth set to contract by 1.7 percent in non-GCC oil exporters after contracting by 1.1 percent in 2018. - Algeria: slightly higher growth in 2019 due to a rebound in oil and gas production. - Yemen: moderate improvement in oil production despite conflict. - Iraq: recovery supported by post-conflict recovery, a rise in fiscal spending, and modest oil production increases after federal/KRG agreement on oil exports. - Medium-term projections depend on implementation of adjustment and reform packages; escalation of regional tensions is a downside risk. ### Oil prices and volatility - Oil prices turned highly volatile at the end of 2018: prices increased nearly 30 percent in the first 10 months of 2018 to more than $80 a barrel, then declined sharply in Q4 2018. - Oil is now trading at about $65 a barrel, just above this year’s projected average. - Renewed volatility reflects supply disruptions, global growth concerns, technological changes, geopolitical uncertainties, US sanctions on Iran and subsequent waivers, and Saudi Arabia’s production ramp-up. - The December 2018 OPEC+ agreement to restrain production until at least June was a response to these swings. - CBOE Crude Oil Volatility Index reached levels last seen during the 2014–15 commodity price shocks (last observation April 1, 2019). ### External and financial balances - Current account balance for the region expected to drop from 5.3 percent of GDP in 2018 to 0.9 percent of GDP in 2019. - Less-supportive global financial conditions in 2018 raised external sovereign borrowing costs for weaker fundamentals (Bahrain, Oman). - Global bond index inclusion for GCC countries could bring some $40 billion in flows over the next year or so, according to market analysts. - EPFR flows: net capital outflows during H2 2018 contributed to lower domestic liquidity growth; global easing in early 2019 led to a recent pickup in capital inflows. - Tighter domestic financial conditions (policy rate increases in GCC, declines in real estate and equity prices) have restrained non-oil activity and contributed to declines in credit and money supply growth. - Credit is expected to decline in most countries; risks of higher nonperforming loans in Bahrain, Oman, United Arab Emirates due to exposure to slowing real estate markets and weak non-oil growth. ### Fiscal positions and consolidation - Fiscal consolidation in the region began in 2014 but slowed with the 2018 oil price rebound; consolidation is projected to slow further in 2019 despite lower projected oil prices. - Fiscal expansion is expected in Algeria, Iraq, and Saudi Arabia in 2019. - Slower consolidation amid lower projected oil prices would heighten near-term vulnerability in countries with limited fiscal space and elevated public debt. - Fiscal breakeven oil prices remain significantly above the current oil price trajectory despite recent reductions. - Total general government debt increased between 2014 and 2018 (country-specific levels shown in source figures). ### Structural challenges and policy recommendations - Need to resume gradual fiscal adjustment to rebuild buffers and insulate economies from oil price volatility. - Adjustment size and pace should reflect country-specific fiscal space and financing needs. - Fiscal stimulus or slower consolidation may be counterproductive given lower potential growth, especially in countries with weak fundamentals (Bahrain, Oman). - Recommended design of consolidation: - Mix expenditure consolidation with revenue reforms. - Reinforce VAT implementation and reduce public wage bills in some countries. - Continue revenue mobilization: Oman’s plan to introduce VAT is welcomed; consider introducing direct taxes (income, property); fight tax avoidance and evasion. - Expenditure reforms: strengthen public investment management frameworks; streamline public wage bills and subsidies; increase social spending; improve fiscal transparency and public financial management. - Anchor fiscal policy in a medium-term fiscal framework with a clear objective (debt ratio, non-oil primary balance target, or multiyear budgeting rule). - Diversification and growth-enhancing structural reforms: - Shift toward private-sector-driven growth to spur domestic investment and nonhydrocarbon foreign investment. - Improve quality of education, reform labor markets, integrate nationals into private employment, and maintain competitiveness. - Improve business environment: robust legal frameworks for dispute prevention/resolution; liberalize foreign ownership regulations; reduce role of public sector as competitor. - Strengthen governance and anti-corruption measures, including anti-bribery and integrity measures and addressing conflicts of interest. - SME-focused measures (SMEs account for more than 90 percent of businesses): - Increase access to financing: tailor funding to SME needs; enhance credit information; promote bank competition; develop capital markets. - Enhance human capital and infrastructure: efficient expenditures on education, technology, and key infrastructure such as broadband. - Deliver a more favorable business environment: robust legal, regulatory, and taxation frameworks; ensure level playing field; improve governance in tax administration and public procurement. ### Social and labor market considerations - Rapid labor force growth in the GCC: IMF staff calculations suggest the region will need about 1 million new jobs a year for at least the next five years to absorb new entrants. - High unemployment, particularly among young people, underscores urgency of reforms to generate inclusive job-rich growth. *Prepared by Selim Cakir (lead author) and Jorge de León Miranda. Middle East and Central Asia Department — REO Update, April 2019.* ### Box 1.1. Financial and Monetary Conditions Indices in GCC Countries ### Box 1.1. Financial and Monetary Conditions Indices in GCC Countries ### Motivation and purpose - A well-designed financial and monetary conditions index (FMCI) could serve as an early indicator of future non-oil economic activity in Gulf Cooperation Council (GCC) countries. - Analyzing information about financial conditions is essential for better assessment of the state of the economy to inform policy decisions. ### Data constraints and challenges - Lack of timely data reduces the variables that could be included. - House price data are available only for Qatar and the United Arab Emirates. - Absence of data on inflation expectations makes it difficult to determine inflation-adjusted real returns. - A monthly industrial production index is not available to assess predictive power of the FMCI against a high-frequency activity indicator. - Dubai’s quarterly GDP figures end in 2017, and quarterly GDP is not available for Oman. - Bond markets are not liquid enough yet to incorporate changes in the yield curve or the term spread into the FMCI. ### FMCI composition (variables included) - Money growth, M2 (year over year), as a measure of liquidity - Stock market (year over year) as equity prices impact household wealth - Real policy rate—the latest annual inflation rate is used as a proxy for inflation expectations to calculate the real policy rate of GCC central banks - Real effective exchange rate—appreciation in the real effective exchange rate represents tightening in the FMCI, whereas depreciation represents loosening - House prices (Qatar, United Arab Emirates) ### Construction, standardization, and interpretation - Variables with the highest volatility are given the lowest weight. - The series is standardized by subtracting the FMCI’s mean and dividing by its standard deviation. - An FMCI value above (below) zero implies a tightening (loosening) in the financial conditions. - The FMCI is used as an early indicator of non-oil GDP growth. ### Empirical findings and predictive relationships - Loosening (tightening) in the FMCI is followed by an increase (decrease) in non-oil activity with a one-quarter lag, where quarterly GDP is available. - Correlations between the FMCI (used as an early indicator) and non-oil GDP growth (last observation December 2018): - Saudi Arabia: Correlation = 0.90 (FMCI inverse, 1-quarter lead) - UAE: Dubai: Correlation = 0.89 (FMCI inverse, 1-year lead) - Qatar: Correlation = 0.73 (FMCI inverse, 1-quarter lead) - Bahrain: Correlation = 0.45 (FMCI inverse, 1-quarter lead) - Kuwait: Correlation = 0.34 (FMCI inverse, 1-quarter lead) - The tightening in the FMCI (reversed in Figure 1.1.1), which started in late 2017, has continued and is likely to be a drag on non-oil growth in early 2019 as well. ### Main drivers of FMCI tightening - Higher policy rates - Declines in real estate (Qatar, United Arab Emirates) - Declines in equity prices (Bahrain, Dubai, Oman) - Slowdown in liquidity growth driven in part by capital outflows *Source: Box 1.1. Financial and Monetary Conditions Indices in GCC Countries, Middle East and Central Asia Department, REO Update, April 2019.* --- _Source: https://www.imf.org/-/media/files/publications/reo/mcd-cca/2019/april/english/menap-chapter1.pdf_